The New Study that Republicans Who Reject Medicaid Must Read

A report indicates just how important it can be in improving poor people's lives

May 2, 2013

A major new study on Medicaid just became public. I know—nothing excites readers more than the phrase “major new study on Medicaid.” Bear with me. This study is already getting a lot of attention: Conservatives and libertarians are citing it as evidence that expanding Medicaid is wrong. That has me wondering: Did they read read the same study that I did?

By now, you're probably familiar with the controversy over the Medicaid expansion. Under Obamacare, the federal government will provide states with money to expand eligilibty for the program, so that anybody with an income at or just above the poverty line can enroll. But states have the option to decline the money. Many states seem likely to do that, at least for the short term. Among them are Florida and Texas, two large states with large numbers of uninsured residents. Several million Americans—nearly 2 million in Texas alone—will lose out on health insurance unless officials in those states have a change of heart.

The common element in states declining to participate is that they are all states in which Republicans have leverage: Either a Republican governor or a Republican-controlled house of the legislature, or both, opposes the expansion. And one reason, obviously, is cost: These officials don’t want their states paying more for Medicaid, even if the amounts are minimal and they’d come out ahead because of savings elsewhere in their budgets. But Republicans and their allies frequently make another argument—that the program doesn’t do much good. Some go farther, and argue that people on Medicaid actually end up worse off than people with no insurance at all.1

That’s where the new study comes in. Opponents of the expansion think the results back up their arguments. The Cato Institute's Michael Cannon, for example, says the study " throws a huge 'STOP' sign in front of ObamaCare’s Medicaid expansion." I think they are reading very selectively. The evidence does call into question one important claim liberals have made about Medicaid—and liberals who make that claim need to start qualifying it. But the study validates two other arugments that defenders of Medicaid make. Both of these arguments are equally important.

The study appears in the New England Journal of Medicine. The two principal investigators are a pair of highly respected economists—Katherine Baicker, from Harvard, and Amy Finkelstein, from the Massachusetts Institute of Technology. They are leading up a team of similarly qualified experts, among them two scholars familiar to readers of this space: Jonathan Gruber (at MIT) and Joseph Newhouse (at Harvard). But the significance of this study is not the authors. It’s the design, which came about thanks to a unique circumstance in Oregon. A few years ago, the state had enough funding to open up its Medicaid program to 10,000 people—and many times that number who wanted the insurance. The state decided the only fair way to distribute the coverage was by lottery.

It was a depressing situation, because so many people who needed insurance wouldn’t get it. But, for researchers, it was an opportunity. Past research on Medicaid was necessarily imperfect, because it compared people on Medicaid to people with no insurance—and the two groups were different in many ways. The ones who sought out Medicaid tended to be poorer and sicker. And while many scholars had tried to adjust for those effects, critics of those studies said the adjustments were incomplete. It’s this uncertainty that critics used to argue that Medicaid was doing very little good—and maybe even doing some harm.

Because Oregon enrolled people randomly, through a lottery, it set up a real experiment. The Baicker-Finkelstein team decided to collect data on these people, and the initial results, reported after one year, were encouraging. People on Medicaid were getting more regular medical care. They were also less likely to have bills referred to collection agencies—a sign that they were not struggling as much with the financial burden of medical bills. (As Ezra Klein noted at the time, "the Oregon experiment wasn’t returning surprising results. Just encouraging ones.") Now the researchers are reporting on their follow-up data, collected after the experiment was underway for two years. And many of the results are similarly favorable to Medicaid—with one key, but important, exception.

The big news is that Medicaid virtually wiped out crippling medical expenses among the poor: The percentage of people who faced catastrophic out-of-pocket medical expenditures (that is, greater than 30 percent of annual income) declined from 5.5 percent to about 1 percent. In addition, the people on Medicaid were about half as likely to experience other forms of financial strain—like borrowing money or delaying payments on other bills because of medical expenses.

That may sound obvious—of course people with insurance are less likely to struggle with medical bills. But it’s also the most under-appreciated accomplishment of health insurance: Whatever its effects on health, it promotes economic security. “The primary purpose of health insurance is to protect you financially in event of a catastrophic medical shock,” Finkelstein told me in an interview, “in the same way that the primary purpose of auto insurance or fire insurance is to provide you money in case you’ve lost something of value.” And while only a small portion of people will experience financial shock in any given year, over time many more will—which means many more will benefit from the protection that Medicaid provides. “Expenses in any given year are important to know,” says Baicker, “but this is supposed to protect against those rare events that happen only once every five or ten or twenty years.”

The other big finding was that people on Medicaid ended up with significantly better mental health: The rate of depression among Medicaid beneficiaries was 30 percent lower than the rate of depression among people who remained uninsured. That’s not just good health policy. That’s good fiscal policy, given the enormous costs that mental health problems impose on society—by reducing productivity, increasing the incidence of violence and self-destructive behavior, and so on.

But one place improvement did not appear was physical health. And this was something of a surprise. The Oregonians on Medicaid were clearly getting more medical care—in particular, more preventive care. This was consistent with the previously reported results. But the researchers found no statistically significant impact on blood pressure, cholesterol, or blood sugar levels and diabetes. The researchers caution that some health effects might take a longer time to materialize. Plus it’s always possible that the limited sample size makes it hard to detect health effects that, by their nature, will affect a small group of people. But, at the very least, these results make predictions of increased health benefits from Medicaid more speculative. (It also suggests that Medicaid needs improvement, which is an argument its defenders make all the time.)

Of course, even if Medicaid isn’t improving health, it’s certainly not making health worse, as some critics have claimed. Meanwhile, it’s improving mental health and providing economic security to some of the most economically vulnerable people in the country. Some critics of the Medicaid expansion dismiss this, or suggest it's a change of rationale. Nothing could be farther from the truth. Financial protection matters a great deal (as does mental health). Just ask anybody who's had to face medical bills without insurance. And, historically, financial protection has been a driving force behind government expansions of health insurance.

Does that make Medicaid a worthwhile investment? That's obviously a value judgment, one no economic study can answer. But health policy experts Aaron Carroll and Austin Fraktpose an awfully good question at The Incidental Economist blog. Financial protection is the reason most Americans who can afford health insruance buy it. If that rationale is good enough for everybody else, why isn't it good enough for the poor?

Probably nobody has made this argument more emphatically, or more relentlessly, than Forbes columnist Avik Roy. Roy is also an investment analyst, a fellow at the Manhattan Institute, and former adviser to the Mitt Romney campaign.